Revamping India’s Corporate Bond Market

Abstract

Much as one would like to assert that India’s corporate bond market has grown consistently over the decade gone by, the growth is nothing to write home about. The growth rate between FY2015 and FY2025 was hard-ly 12 percent, according to NITI Ayog. Further, in absolute terms, the outstanding corporate bonds rose from around INR 17.5 trillion in FY2015 to about INR 53.6 trillion in FY2025. Corporate bonds account for a meagre 14 percent plus of the country’s GDP, compared to South Korea’s 79 percent and Malaysia’s 54 per-cent! They hardly account for three percent of the global corporate bond market! The latter’s revamp is over-due for assorted reasons, according to respondents the researcher interacted with. They remark that by de-fault, our corporates depend upon banks for their funding requirements. Consequently, a sizeable chunk of the credit risk is borne by the banks. Banks have to depend on only short-term and medium-term deposits for their working capital needs. Hence, financing long-term projects poses an asset-liability management issue for banks. Banks therefore price in this fact while pricing their funds for such projects, leaving the corporates with no alternative but to grin and bear it! A vibrant corporate bond market can help the corporates access long-term capital directly. This will ease the pressure on banks and help them achieve risk diversification. Retail investors have been participating spiritedly in the equities market lately and would relish investing in the corporate bond market too. To begin with, the regulator should entice the aspirational retail investors to invest in debt mutual funds. Fund managers who handle portfolios can invest in corporate bonds. Simultaneously, returns on such investments should be accorded the same tax treatment as returns on equity invest-ments. In other words, they should be subjected to capital gain rates.